In the works for over last one year, the government on Friday decided to announce the merger of 10 PSU banks into four. As it coincided with the announcement of first quarter GDP number of 5 per cent, market experts termed the bank merger announcement as a “good move, but bad timing”.
Banking analysts and top officials at mutual funds said that while the move will benefit in the long run as it will create large banks and improve efficiency of the banking system, it is expected to further slow down bank lending — especially by those that are getting merged, in the near term.
“The banks that are getting merged will see a slowdown in decision making at the top level as senior officials of such banks would put all the decisions on the back-burner and it will lead to a drop in credit delivery in the system,” said the CIO of a leading mutual fund. In fact, the three-way merger of Dena Bank and Vijaya Bank with Bank of Baroda took over six months to come into effect. While the government first proposed the merger of the banks in September 2018, the merger came into force on April 1, 2019.
The head of a leading financial services firm said that there seems to be a lack of co-ordinated effort within the Centre to lift the economy. “There is a slowdown in the economy and private consumption and investments are down and at a time when you need to lift the economy and increase the credit flow in the short-term, you take a decision that will block the credit in the short term,” said the official. He added that the measures being announced leave a lot to be desired. “More than interest rate transmission, we need transmission of liquidity and that is not happening.” There is a growing concern in the market over the continued slowdown in growth from 8 per cent to 5 per cent in five quarters and analysts called for steps that can revive the economy and growth in the near term.
“The momentum at which we have lost 3 percentage points of GDP growth is a matter of concern,” said an economist. Banking experts say that the merger may take around six months to come into effect, and till that time banks getting merged with the anchor banks will see a freeze in decision making. “The idea is good but the timing is bad,” said a fund manager with another mutual fund.
“Smaller state-owned banks are generally inefficient and so the idea to merge them to make a large bank would be a good one in the long run. However, at a time when the consumption is slowed down significantly, the merger will slow down lending at their entity level and also within the system. This will throw up a short-term challenge to prop up growth …” said the fund manager.